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Fossil Fuel Subsidies

Have you ever wondered what government benefits the fossil fuel industry enjoys? Here is a comprehensive breakdown: Fossil Fuel Subsidies.

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Wednesday, November 7, 2012

According to [some], OPEC is a blessing because the world is allegedly running out of oil, and by raising the price, the wise men of the cartel are helping us all to conserve.

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Now it is true that raising the price of oil will tend to cut consumption, but not by much. Oil demand is very inelastic — it takes enormous price increases to effect any significant change in consumption. If we accept the demand curve hypothesized in Figure 1, we see that a cut in oil consumption from 85 to 70 million barrels per day (an 18 percent reduction) needs a near quadrupling of the oil price to be enforced.

The real historical data...suggests that the situation is far worse — the quintupling of oil prices since 2001 was implemented by OPEC simply by cutting 5 million barrels — or 7 percent — out of the oil supply. During the same period, sales of cars with low gas mileage, such as SUVs, continued to grow without missing a beat.

If we actually wanted to enforce global petroleum conservation through price increases, we would have to raise costs several hundred dollars per barrel. That would give the Saudis control of the world.

Fortunately, however, the claim that the world is running out of oil has no foundation whatsoever. Such claims have been made repeatedly in the past, and all have proven false. For example, as Learsy notes in Over a Barrel, in 1874, the state geologist of Pennsylvania, then the world’s leading oil producer, estimated that the United States had only enough oil for another four years. In 1914, the Federal Bureau of Mines said we had only ten years of oil left. In 1940, the bureau revised its previous forecast and predicted that all our oil would be exhausted by 1954. In 1972, the prestigious Club of Rome, using an inscrutable but allegedly infallible M.I.T. computer oracle, handed down the ironclad prediction that the world’s oil would run out by 1990. The club said at that time that only 550 billion barrels were left to humanity.

Since then we have used 600 billion barrels, and are now looking at proven reserves of a trillion more. There is little new about today’s fascination with “peak oil”; since 1972, there have been repeated predictions of imminent oil-supply exhaustion published every few years by various authorities, and not one has come true.

In fact, if we look at the ratio of proven reserves to consumption rate, the world has a bigger oil supply today than it ever has at any time in the past. The argument that we are threatened with near-term oil exhaustion is simply untrue.